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Valuation of Equity-Indexed Annuities Under Stochastic Interest Rates

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  • X. Sheldon Lin
  • Ken Seng Tan

Abstract

This paper considers the pricing of equity-indexed annuities (EIAs). Traditionally, the values of the guarantees embedded in these contracts are priced by modeling the underlying index fund while keeping the interest rates constant. The assumption of constant interest rates becomes unrealistic in pricing and hedging the EIAs since the embedded guarantees are often of much longer maturity. To solve this problem, the authors propose an economic model that has the flexibility of modeling the underlying index fund as well as the interest rates. Some popular EIAs are illustrated to assess the implication of the proposed model.

Suggested Citation

  • X. Sheldon Lin & Ken Seng Tan, 2003. "Valuation of Equity-Indexed Annuities Under Stochastic Interest Rates," North American Actuarial Journal, Taylor & Francis Journals, vol. 7(4), pages 72-91.
    • Handle: RePEc:taf:uaajxx:v:7:y:2003:i:4:p:72-91
    DOI: 10.1080/10920277.2003.10596119
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